Is Deception ever Justified Essay

There are many points of view on the justification of deception. Some argue that deception is never something that should be used, or accepted in society. People sometimes force themselves to tell the truth even in situations where it can cause more problems than a lie. This can be viewed as the right thing to do because the general norm in society is to always tell the truth. And even though on the outside we all say that we are honest and truthful people, deep down we all lie every now and then. Whether it be to get out of a sticky situation or to prevent an overall worse outcome. As human beings we tend to strive for perfection, and part of being perfect means we are honest. Honesty is something that everyone possesses, but it is not something that we all use in general. People should not strive for perfection because the truth is, none of us are perfect and none of us can ever be completely honest one hundred percent of the time. Some of us have to lie it’s part of our brain that just wants to do what is best for you and the people around you, whether it is telling the truth or a lie. Deception can be justified because it is the higher ethical choice for us to lie for the benefit of ourselves or others, and it can be highly beneficial to tell a lie than expose a harmful truth. It is commonly the higher ethical choice for someone to stray from the truth to benefit themselves or others because most of the time the truth can mean bad things and as people we try to avoid those bad things. It can be said that it is wrong to lie just because you are trying to get yourself or others out of trouble. In some cases this is true, for example if someone commits a felony and truly deserves justice.

How does Iago manipulate Othello Essay

Perfect people do not exist in this world of temptations, failures, and suffering. In fact, every person has weaknesses, and there is always a possibility that someone will use those feeble points against that man. Shakespeare’s play Othello shows an example of how one can control others exploiting their weaknesses and the consequences of such actions. The character of Iago, the antagonist in the tragedy Othello, instigates chaos, deception, and gross manipulation. He is the center of all the evil events in the play. He manages to completely deceive everyone by displaying an honest facade. Thus he is able to instill trust in all those around him. Since no one sees him for the evil and deceiving man that he really is, he manages to manipulate everyone. He exerts control and power over others in order to fulfill his goals of destroying Cassio and completely demeaning Othello and ruining his reputation. Roderigo’s passion to Desdemona, his foolishness, and trusting nature help Iago to succeed in his evil plan. Another object of manipulation is Cassio whose love for women and wine as well as his concerns of reputation makes him a victim of Iago’s brutal intentions. The Moor, the cause of Iago’s revenge, is described as someone who heavily relies on the advice of others which becomes used against him by his friend. Also he becomes caught in Iago’s web because of his disability to cope with jealousy put in his ear. Othello jumps quickly into conclusions and finally kills Desdemona and himself that satisfies Iago’s desire of revenge. Therefore, Iago is able to manipulate Roderigo, Cassio, and Othello by exploding their weaknesses. Being a blind fool and maintaining hopeless love for Desdemona, a woman of his dream, Roderigo is hurt by Iago who uses his weak spots to fulfill the revenge. Iago knows of Roderigo’s weakness of being totally devoted to Desdemona and of his obsession of winning her back, so he exploits it well. With promises of reunification with Desdemona, Iago twists Roderigo’s weakness to his advantage since he needs money and wants his hands to be clean. Iago is the one who manipulates his feelings toward Desdemona and motivates his actions. First Iago, in the moment of Roderigo’s despair, convinces him that Desdemona’s infatuation will end as soon as she’ll get bored sexually with Othello, so there will be a new way to get closer to her. Later he makes Roderigo believe that she has an affair with Cassio that  provides Roderigo with incentive to bring down and then kill Michael. Iago also puts in his head that Othello and Desdemona are going to Mauritania and he will not be able to win her back, but if Cassio dies then they will have to stay in Cyprus. Roderigo, being a naà ¯ve trusting fool, believes every Iago’s word. In his turn Iago despises Roderigo, referring to him as to a faithful to his master dog by saying that he is â€Å"poor trash of Venice, whom I leash for his quick hunting†. Roderigo’s disability to use his brain is showed in his foolishness of not understanding that Iago uses himas a source of money. However, even when he gets to suspect Iago in cheating on him, the master of evil finds the way out and Roderigo is left in fools again. Roderigo’s trusting nature and self-pitying does not allow him to take control over things by himself, so he sets his hopes on Iago who manipulates him playing on his weaknesses in order to fulfill his desire of revenge. Cassio with his good reputation, love for women and wine being his real weakness is another character that is exploited by Iago. Iago hates Michael since he was chosen over Iago to become a lieutenant even though Cassio is, according to Iago, an inferior soldier. Since Iago is aware of Michael’s â€Å"very poor and unhappy brains for drinking†. On the first step of destroying him Iago gets Cassiol to drink too much of wine, one of his main weaknesses, while on duty, challenging his loyalty to Othello and causes him to brawl with Roderigo. When Othello discovers the drunken Cassio, he dismisses him. This is exactly what Iago had envisioned. The humiliation of Michael due to his dismissal and loss of rank is the fulfillment of one of Iago’s major goals. On the next step â€Å"honest man†, as he is called by Cassio, maintains the facade of fake sincerity and loyalty to Michael while at the same time deceiving and plotting his destruction. Ironically, Cassio seeks Iago’s advice on how to regain Othello’s trust and favor while Iago is actually the source of his problem with Othello, Iago gives Michael advice for his own evil purposes. He advises Cassio to talk to Desdemona about influencing Othello. Unfortunately, this advice is a form of manipulating, since Iago perfectly knows that Michael is â€Å"a fellow almost damned in a fair wife†. Also by begging, or bowing down to a woman, which was not to be done in those times, Cassio shows more of a weakness. Although Michael is seeing Desdemona to talk about his position and reputation, Iago hints his  suspicious of Cassio and Desdemona’s affair to Othello creating an interest in him. Also Iago becomes a great friend of Michael who even doesn’t allow to himself to get to know more about the handkerchief given by Iago to him. His trusting nature is completely under the power of Iago who provides a support for him. Therefore, Iago takes c ontrol over Cassio and his weaknesses, but Michael, blinded by Iago’s outside friendly nature, does not realize that. Iago’s poison pours on to Othello’s mind and makes him to be manipulated by the enemy. Iago, when makes his plan says: The Moor is of a free and open-nature, That thinks men honest that but seem to be so, And will as tenderly be led by th’nose As asses are (act 1, scene 3) Othello heavily relies on the opinions of others, as he did when choosing the lieutenant to be Cassio, not Iago. Also the Moor puts all his trust in Iago during times of war and during Othello’s marriage to Desdemona. This wasn’t very bright of Othello. His trusting nature makes him vulnerable. His involvement with Desdemona translates into a deeper trust with heart. Being older than she is, Othello has fears that she will find a younger man who is more attractive than Othello. This makes him open to Iago’s plan. As a result when Iago creates rumors of Desdemona’s involvement with Cassio, Othello’, being already insecure with himself falls deep into Iago’s trap. Besides the fact that he is older than his wife, Othello also has insecurities about his race. He is a black man living among white men who are sometimes make judgments about his race and how it affects his work. In addition, to his fears, Othello has passionate nature does not allow him to think over what he hears or if it is true, but let his jealousy take over his actions. Othello’s emotions begin to grow from jealously to anger. He has never been heart broken before and now all his emotions of melancholy  are running through his mind. â€Å"How shall I murder him, Iago?† Already Othello had sunken in everything Iago had said. Not thinking straight and letting his emotions run untamed, he can only think of death as a way to resolve everything. He jumps very fast into conclusions that lead to a downfall. Iago poisons Othello’s mind with lies about love, Desdemona, and his trusted lieutenant, Cassio and causes him to destroy them both. Iago realizes that by causing Othello to destroy both Desdemona and Cassio Othello will at the same time destroy himself and his reputation. Being under pressure of Iago who controls him exploiting his weaknesses Othello ruins himself and people around him. Exploiting the major weaknesses of Roderigo, Cassio, and Othello, Iago is able to control and hurt them. He moves his friends as if they were chessmen. He uses their individual aspirations and passions to motivate them to whatever devious plan he desires. However, in each case Iago doesn’t have to push very hard because his suggested actions either seem harmless resolutions to each character’s woes or take advantage of character flaws. Because he does not have to push very hard, he is able to maintain an air of apathy while promoting his ultimate malevolent goals: â€Å"I am not what I am†. In Roderigo’s case Iago successfully manipulates him using his weak personality and passionate love to Desdemona for his own purposes. Cassio’s love for women and his weakness to wine is what helps Iago in controlling him. Othello also is caught by Iago in his web of lie since his trusting and passionate nature, insecurity in him makes him vulnerable to Iago. Sha kespeare shows the consequences of being trustful and naà ¯ve. A person should think of what is right and wrong, but not rely on the advices of others as Roderigo, Cassio, and Othello did. One must have his own head on the shoulders, and should live using his mind and consciousness in order to avoid the situation of being under somebody’s control.

American Airlines Flight Case Study Essay

Cause(s) of Accident The National Transportation Safety Board (NTSB) determined that the probable cause of this accident was the asymmetrical stall and the ensuing roll of the aircraft because of the uncommanded retraction of the left wing outboard leading edge slats and the loss of stall warning and slat disagreement indication systems resulting from maintenance-induced damage leading to the separation of the number 1 engine and pylon assembly at a critical point during takeoff. The separation resulted from damage by improper maintenance procedures which let to failure of the pylon structure. Structural and Mechanical Factors After a thorough examination of the pylon attachment points, fractures and deformations at the separation points in the forward bulkhead and thrust link were all characteristic of overload. Testimony indicated the forklift was not powered for a period of time because it ran out of fuel. Post accident forklift tests showed that under these conditions leakage would allow a drift down of 1 inch in 30 minutes. Movement of 0.4 inch or less would produce a 7 inch fracture at the flange. Contributing Factors The design and interrelationship of the essential systems as they were affected by the structural loss of the pylon contributed to this accident. Flight control, hydraulic, and electrical systems in the aircraft were all affected by the pylon separation. When the engine separated from the pylon hydraulic pressure and fluid were lost and not recoverable. The separation also severed the electrical wire bundles inside the pylon which included the main feeder circuits between the generator and the No 1 a.c. generator bus. The flight crew was unable to restore power to the aircraft. The failure of engineering to ascertain the damage-inducing potential of a procedure which deviated from the manufacturer’s recommended procedure was another contributed factor. The procedure in question was the removal of the pylon attaching hardware and the positioning of the forklift. As a result, maintenance personnel altered the sequence of hardware removal. Investigation Board Findings The engine and pylon assembly separated either at or immediately after liftoff. The flight crew was committed to continue the takeoff. The aft end of the pylon assembly started to separate in the forward flange of the aircraft bulkhead. The structural separation of the pylon was caused by a complete failure of the forward flange of the aft bulkhead after its residual strength had been critically reduced by the fracture and subsequent service life. The length of the overload fracture and fatigue cracking was about 13 inches. All electrical power to the number 1 a.c. generator bus and number 1 d.c. bus was lost after the pylon separated. The captains flight director instrument, stall warning system, and slat disagreement systems were rendered inoperative. Power was never restored. The number 1 hydraulic system was lost at pylon separation. Hydraulic lines and follow up cables of the drive actuator for the left wing’s outboard leading edge slat were severed by the separation of the pylon and the left wing’s outboard slats retracted during climb out. The retraction of the slats caused an asymmetric stall and subsequent loss of control of the aircraft. The pylon was damaged during maintenance performed on March 29 and 30, 1979 at the American Airlines Maintenance Facility in Tulsa, Oklahoma. Engineering personnel developed procedures for removing the pylon and engine that deviated from manufacturers procedures, and did so without performing proper tests. Recommendations The NTSB recommended that the Federal Aviation Administration (FAA) issue immediately an emergency Airworthiness Directive to inspect all pylon attach points by approved inspection methods. Issue an Airworthiness Directive to require and immediate inspection of all DC-10 aircraft in which an engine pylon assembly had been removed and reinstalled for damage to the wing-mounted pylon aft bulkhead, including its forward flange and the attaching spar web and fasteners. Issue a Maintenance Alert Bulletin directing FAA maintenance inspectors to contact their assigned carriers and advise them to immediately discontinue the practice of lowering and raising the pylon with the engine still attached and adhere to recommended manufacturer procedures. Outcomes After a series of post accident inspections disclosed damaged aft bulkheads in the wing to the engine pylons, the Administrator of the FAA issued an Emergency Order of Suspension on June 6, 1979, which suspended the DC-10 series aircraft type certificate until such time as it can be ascertained that the DC-10 aircraft meets the certification criteria of Part 25 of the FAR and is eligible for a Type Certificate. Twenty days later the FAA issued Special Federal Aviation Regulation 40 which prohibited the operation of any model DC-10 aircraft within the airspace of the United States. On July 13, 1979, after a series of formal investigations, the Administrator found that the DC-10 met the requirements for issuance of a type certificate. And the Emergency Order of Suspension was terminated. In November 1979 the FAA fined American Airlines $500,000 for using faulty maintenance procedures on its DC-10 aircraft by using forklifts to mate the complete engine/pylon assembly with the wing attachment points. Continental Airlines was fined $100,000 on a similar charge. References Aviation Safety Network. Retrieved October 20, 2010, from http://aviation-safety.net/database/record.php?id=19790525-2 NTSB. (1979). Aircraft Accident Report, American Airlines, Inc. Flight 191. Retrieved October 20, 2010, from http://www.airdisaster.com/reports/ntsb/AAR79-17.pdf

Finance Project Case Study Example | Topics and Well Written Essays - 750 words

Finance Project - Case Study Example The PPP on the other hand stipulates that identical products should sell at a common price when the conversion is done in the same currency. Changes in the prices in local currency due to inflation should be counteracted with an adjustment in the exchange rate to level the relative prices (Sercu, 2009). In the above case, Mr. Bozarth should use the Interest Rate Parity Theorem as follows: b) The board can decide to either invoice in home currency only, that is, undertaking only those transactions denominated in the home currency, or engaging in transactions denominated in stable foreign currencies such as the Dollar and Sterling Pound. They may also use of leads or lags. Use of advance payments or delayed payments. The company will benefit from expected exchange rate fluctuations by properly timing of its payments and receipts (Madura). The use of natural hedge by considering opening a foreign currency account to eliminate the risk of exchange movements and provide a suitable option if a client insists on billing in their currency. Forward Exchange Contract; The company can enter into an agreement with a bank to buy or sell a given amount of foreign currency at a specified date and rate. Money market Hedge can also be used where the company establishing a foreign currency obligation or asset by investing or borrowing in that foreign currency to match an existing liability or asset respectively in that currency (Madura,2011). Use of futures. the currency futures are bought or sold and losses arising due to foreign currency fluctuations on the actual transaction is matched by gain or loss in the future transaction. Under futures contracts, the parties come to an agreement to buy or sell an asset at a given fixed rate called the delivery price at a given date. The exchange rate might fluctuate either positively or adversely during this period to the date of payment but the pre-agreed rate will be used in

The purpose of this assignment will be to explore how a Family Nurse Research Paper

The purpose of this assignment will be to explore how a Family Nurse Practitioner can influence their local communities, within their chosen roles, to achieve a - Research Paper Example ue the fact that many individuals in society are discriminated due to the fact that they have various forms of disabilities (Institute of Medicine 2011). These individuals in the community are hidden away from others because they are considered a shame and therefore are not accorded the necessary health care they require. Achieving this goal of according equity and eliminating disparities is necessary not only as a way of helping those individuals with disabilities access health care but also as a way to educate the community on the importance of treating such people with justice and not discriminate against them because they are individuals just like them (McKenzie et al. 2011). In the community I come from, people with disabilities are treated like lepers in the old days. They are locked up from the moment they acquire the disability of whatever form. They are not even taken to hospitals to find out if they can get any assistance like being given prosthetics, wheelchairs or even crutches. These individuals are sometimes locked up in different houses (which are constructed like cells) because they are believed to be contagious and therefore shunned away. They are not given enough food, and sometimes none at all. The occasional food they are given is not nutritious at health and hence such individuals suffer from malnutrition and malnourishment on top of other health-related opportunistic diseases and infections like coughs. The nurse practitioner is specifically trained to provide individual health care (Rimmer and Cross 2002). This skill comes in handy in the initial stage of the â€Å"project† where they carry out assessment of the individuals with disabilities within the community and the form of disability they are facing. It is also necessary after teaching the local community (during monitoring and evaluation stage). This is because they will be able to move to those homes with such individuals and see if their treatment in relation to health has

Discourse analysis Essay Example | Topics and Well Written Essays - 2500 words

Discourse analysis - Essay Example The essay concentrates on scout since she is a key character as well as portraying the author when she was young as well as when she grew up and came to understand the various things that were different for her to understand when she was young. Prejudice is defined as an opinion on an individual that is usually based solely on religion or race before even all the facts are known (Johnson 1994). This essay will seek to explain the various instances of prejudice that are shown in the book especially those that touch on Tom Robinson, Boo Radley and Atticus Finch since they are the key characters in the book. I will also have a look at aunt Alexandria and her role in the book. She was introduced in the story as a defender of the tried and tested status quo in the southern society that the book was set in. The novel I used to work on this essay has no published Coda. The discourse analysis is on Lee Harper’s To Kill a Mockingbird hence this will be the principle form of literature in this narrative. The other books played a mostly supplementary role to this book. I also intend to make use of Understanding to Kill a Mockingbird: A Student Casebook to Issues, Sources, and Historic Documents. This will be of help to me since it pinpoints the main issues in the novel such as racism and prejudice which are the main topics of the narrative. This makes it much easier to understand and critique where necessary as I read along. Zakrzweski Janelle’s Reading Race: Exploring Racial Themes in to Kill a Mockingbird will also be particularly useful since race is the most critical issue in this book as it was written in the thick of the civil rights movement in the south. The book resonated with the prevailing mood in the society. The study of identity plays a significant role in modern sociological thought. I had to come up with the various ident ities in the narrative and this was helped by going through Karen Cerulo’s essay titled Identity Construction: New

How Important Film Direction is Essay Example | Topics and Well Written Essays - 500 words

How Important Film Direction is - Essay Example Use of right themes in all areas develops the right shade of emotional psychology in the actors which reflects in their acting and wins them the appreciation of millions of audiences after the film is released. The director selects the costumes for the actors keeping in view several factors that include but are not limited to the demand of the role of the actor, the situation, the context, the background, the mood, and the light effects. The director selects colors for the sets and everything contained in them (Lumet, 1996, p. 9). There are certain colors that give the scene a gloomier feel while there are other colors that lend a vibrant and flamboyant touch to the theme. Nobody but the director decides what shade of a color is appropriate since the wrong shade of a right color for a scene makes the color the most inappropriate choice. The director positions the actors and various objects in their surroundings in such a way that they interact with one another and are meaningfully in cluded in the video. The importance of a director can be estimated from the fact that it is fundamentally the director who makes a film different from a book, and lends the film its own unique individuality. There have always been books for the stories, but the idea of converting a story into a film fundamentally emerges from the direction, as all it takes to make a video falls into the domain of a director’s responsibilities. One of the prime responsibilities of a director is to remove any ambiguities which may arise between the producer and the actors along the way. â€Å"It is the director’s job to mediate any concerns the actor has about the writing or the writer has about the acting† (Weston, 1996, p. 119). The director is like the sailor of the ship. It depends, to a large extent, upon the capability of the director whether the ship will make it to the destination or sink on its way to the destination.  Ã‚  

Flooding in Ottawa Illinois Essay Example | Topics and Well Written Essays - 2000 words

Flooding in Ottawa Illinois - Essay Example Finally, by choosing to discuss this hazard, the solutions that come from it will educate public and they will therefore have knowledge in handling such an incident when it occurs. In the last five years, seven disasters were experienced in Illinois. For instance, last summer, more than $300 million was put into operation to aid in management of the aftermath of the flood. Also in June 2008, Midwest floods initiated widespread flood destruction across Illinois owing to insistent heavy rains that caused rivers to spill over their banks. Insured losses to Illinois inhabitants totaled $5.3 million. The Great Midwest Floods of 1993, was one of the biggest floods in U.S. history. The outcome was approximately $273 million uninsured flood destruction and an estimated $15 billion in total damages. The approximate amount of damage cause tolled to around $2.6billion and $60.7 million of them insured losses (Barry, 2007). The probabilistic point of view for flood potential issued by the NWS on March 6, 2014 gives a probabilistic valuation of flood potential using the vocabulary presented below. These viewpoints indicate that the likelihood in percent that slight, modest, or major flooding will take place. Additionally, they provide statistics regarding the possibility a given river stage will be equaled or exceeded during the present forecast period. Property destruction and financial losses are one side of the story. Alternative perspective focuses on the consequence the flooding has had on the surroundings and the modifications it made to the physical land. Flood waters leads to erosion thus changing the shape of the land. This is caused by the chemicals and organic material deposit carried within the floodwaters. Also flood interfere with shipments of essential commodities like foodstuff, chemicals and other products. When canal are flooded and becomes impassable, ship and other marine means of transport

Computational MCMC Bayesian Inference Assignment

Computational MCMC Bayesian Inference - Assignment Example On the other hand, parameters are uncertain and thus are represented as random variables. Since it is not usual to consider a single value of a parameter, we get a posterior distribution. A posterior distribution sums up all the current knowledge about the uncertain quantities and parameters in a Bayesian analysis. It is mainly the distribution of the parameters after examining the data. However, the posterior distribution is not a good probability density function (pdf), so as to work with it as a probability function it is renormalized to obtain an integral of 1. The Bayesian inference uses the MCMC so as to draw samples from the posterior distribution which aid in getting ideas about the probability distribution function. In addition, MCMC is a methodology that provides solutions to the difficult sampling problems for the purpose of numerical integration. The basic idea behind MCMC Bayesian inference is to form or create a Markov process. This process has a stationary distribution ?(?|D) and then after forming the process run it long enough so that the resulting sample closely approximates a sample from ?(?|D). The samples obtained from this process can be used directly for parametric inferences and predictions (Chen, 2010). With independent samples, the law of large numbers ensures that the approximation obtained can be made increasingly accurate by increasing the sample size (n). The result still holds even when the samples are not independent, as long as the samples are drawn throughout the support of the ?( ?|D) in the correct proportions. Account of MCMC Bayesians Inference When using MCMC Bayesian simulation, we find out that an increase in attempts number that vary within different year performance, leads to an increase in goals, and we come up with a conclusion that scoring of this player happens with a nearly 2.3 minimum number of attempts in the corresponding continuum. The inference will be driven by a formula where we have the summation of the at tempts will be posterior distributed, so by letting X be the random quantity which is discrete to denote the number of successes those are the goals. We will have a MCMC inference by developing a Markov chain with equilibrium. Every field goal scored if affected by a given number of attempt updates. Though the distribution algorithm, we generated in the creation of results we can say that there is a uniform prior leading to a sensible distribution. This posterior distribution also has a tail of infinite total probability mass of attempts but a miniscule probability on goals at each year (Lynch, 2007). The main solution behind this distribution, is to, first come up with the mean and variance from a normal distribution, when they are both known, the priors will then be written down, which will be representing some state of knowledge then come up with a posterior probability distribution for the parameters. This posterior distribution calculation on the MCMC inference simulation, will then work perfectly for the type of data given about the athlete. The goal scoring will definitely increase with an increase of the number of attempts. Model formation The Bayesian factors can be put together with prior odds so as to yield posterior probabilities of each and every hypothesis. These can be employed weighing predictions in the Bayesian model averaging (BMA). Although Bayesian Model Averaging sometimes is an effective, and efficient pragmatic tool for making predictions, the usage

Martin Luther King, Jr. Malcolm X Assignment Essay

Martin Luther King, Jr. Malcolm X Assignment - Essay Example Is the introduction successful in convincing you of this? Why or why not? The introduction was successful in making me believe the two leaders were polar opposites in their ideas of a revolution. They both, however, had the same agenda, to fight for the rights of the black man. King believes it is dangerous to organize a movement against self-defense. He says there is no need to kill the principal if you want to go to school or burn a factory that you intend to go work. Pitney brings out King’s ideas in his book in the form of the speech. â€Å"I am convinced that for practical as well as moral reasons, nonviolence offers the only road to freedom for my people.†1 Kings tell his people about the record of changes in the South of America with a nonviolence approach to redeeming his people.2 The people of the South had made progress regarding integration between blacks and whites. Malcolm X believes the only way to redeem his people and get their land was through violence. Malcolm X preached violence for the black people to be able to achieve a revolution. He compares the black peoples revolution to that in Africa, where the people had to be violent to receive their land. He believed in African Americans owning land to be equal to the white peopl e. â€Å"So I cite these various revolutions, brothers and sisters, to show you that you dont have a peaceful revolution. You dont have a turn-the-other-cheek revolution. Theres no such thing as a nonviolent revolution. The only kind of revolution that is nonviolent is the Negro revolution. The only revolution in which the goal is loving your enemy is the Negro revolution†.3 The quote is part of Malcolm X thoughts regarding nonviolence of the African Americans towards the revolution. Martin Luther King was looking forward to a time when the black and white people would be sitting at a table together as brothers. Malcolm X first interest on the other hand was African Americans to

Retaining Customers Essay Example for Free

Retaining Customers Essay BT is one of the largest communications companies in the world. One of the services they offer is residential or personal communications solutions. Even though they now have competition from other companies offering consumers substitutes for their service, they still hold the largest market share of providing residential customers with telephone lines. For BT to maintain this market share, they must retain the customers they have. I will be recommending how they can retain their customer base as well as winning new customers. I will be looking at several models and theories in order to do this. * Making Customers into Champions * The case of the complaining customer * The tip of the Iceberg Model From BT a customer receives a core service. Telephony. The customer expects the telephone in their home to be working when they pick it up. They are not going to be wowed by the service if it is just working. However, when the customer makes contact with BT to enquire, change or add something they will use this opportunity to form a perception of BTs Customer Service. Most people who move to a different telephone provider do so because they perceive indifference in the people they do business with at their current company. Customer feedback tells BT that one of the biggest drivers of dissatisfaction is the difficulty in registering their complaint with BT. A large part of this dissatisfaction stems from a lack of promised callbacks and an initial difficulty in escalating their issue. This feedback has been substantiated by OFTEL in that the number of customers contacting them to complain that they have not received a promised call back has been increasing. OFTEL have given BT a very clear indication that they expect this situation to be addressed and therefore it is paramount that the following recommendations are implemented immediately. * Own, Decide, Do Training to be rolled out to all Customer Service Advisors. When a complaint is received in the 150 call centres the individual must own the complaint, make a decision about what to do with it and follow any promised action up with a call to the customer to let them know what happened. * Keeping the customer informed With some complaints resolution may not be speedy. There may be some technical difficulties, which hold resolution up. The customer does not know this and will perceive any periods of silence as the indifference of BT to their complaint. Keeping the customer informed of progress or news (good or bad) will enhance the customers perception of BT * EDCSMs (Event Driven Customer Service Measures), the service that BT offer customers must be analysed in order to measure its success. Through BTs sophisticated SMART datatbase, every contact with the customer is logged with the id of the advisor who took the call. This way trends can be spotted as well as training areas The barriers for the customer to successfully register their complaint are as follows: * The BT shunt BT is a huge business with over 20 large call centres taking in the freephone 150 (customer service) calls. It is very easy for complaints to get lost in the system. * The call steering system. There are many different numbers to press for different departments. It is difficult to speak to a human * The Call Handling Time that advisors are encouraged to adhere to. This measure the amount of time they are talkng with each customer in order to keep the Percentage of calls answered as high as possible. * Poor training and coaching target based coaching instead of skills based coaching In the longer term there are some other changes that should be implemented by BT over a period of time in order to instil enhanced behaviours in all employees. Traditionally employees of a company see a complaining customer as being a nuisance. BA challenged this when they introduced the Making Customers into Champions Model. This model can be directly applied to BT, who is, itself, striving to provide World Class Customer Service. This model labels different sectors of the customer base and how likely they are to contact BT with any dissatisfaction they may have and how easy it is to register this dissatisfaction. If the customer has a complaint and they cannot register this in any way, they may feel tempted to try a different provider. If the complaint is not registered then BT has not had a chance to resolve the complaint. If BT has a chance of resolving the issue, if it is resolved skilfully and well, research suggests that this could actually enhance the customers perception of BT. So, in short, a customer complaint can turn in to a glowing report for BT. Furthermore, if we make BTs customers in to champions, BT can learn from the mistakes they have made that might have caused complaints in order that they do not occur again. * A dissatisfied customer will tell between 10 and 20 other people about their problem * A customer who has had a problem resolved will tell 5 people about their situation The case of the complaining customer is a valuable study that BT should already have taken heed of. The problems experienced by Mr Shelton almost mirror the experiences some BT customers have when things go wrong and customer relations are tested to the full. It may be tempting for some employees working for such a huge cash cow as BT to believe that BT can afford to lose difficult customers. This study shows that whilst few customers actually take the time and energy that Mr Shelton did to complain, there are actually many other dissatisfied customers (Mr Shelton is just the tip of the Iceberg). These customers are the missing in action group and will just quietly take their custom elsewhere and thus impact significantly on BTs profit margins. The article points out that whilst it would be easy for us to read Mr Sheltons contacts with the company as neurotic, in actual fact Mr Shelton has responded very emotionally to the way he feels his complaint has been dealt with. Customers should be allowed to vent their feelings, feel listened to and valued before their problem is resolved. They are experiencing feelings of powerlessness and this will be compounded if they feel that an advisor is not listening to them. Paraphrasing can be a useful tool here, to show empathy and check for understanding. TARP published a graphic representing the Tip of the Iceberg Principle. It indicates that consumer complaints to a third party are only a small portion of those that exist. Theyre just the visible portion and reflect the much broader picture. This demonstrates how important it is for BT to be proactive in gaining feedback from customers at every possible opportunity. It was not the tip of the iceberg that sunk the Titanic, and it will not affect the business greatly if just those visible customers were dissatisfied with BTs service. Those that leave quietly will have the greatest impact and BT will have little or no information as to why they left. BT must strive to deal with any customer requests the first time every time. Here is a list of my recommendations for BT for implementing across the board over the next 12 months in order to retain customers. * A review of the training process all training should be underpinned with updated balance scorecard and appropriate coaching given by line managers * Quality must come before quantity. If all customers were dealt with the first time they called, there would be less calls * Approach customer complaints as a chance to dazzle and delight customers and enhance a customers perception of BT through a training programme * Work together with different departments and not as adversaries. Promote teamwork * Introduce an incentive scheme for teams and individuals who achieve excellent customer relations * Use customer feedback more effectively (EDCSMs)- find out what customers want/expect then exceed this * Give staff more responsibility and authority to deal with complaints. Allow then to be flexible when it comes to procedural rules. Stop quoting BT policy. * Allow a measure of redress such as goodwill payments and compensation payments In implementing the above and re-training staff, BT will retain greater numbers of customers. Existing customers (especially those we have information about) are an ideal group to market new products to as well gain information from about how to improve on the products and services BT has.

Vikki and Tim decide to meet with a mortgage lender Essay Example for Free

Vikki and Tim decide to meet with a mortgage lender Essay Vikki Rocco, (age 26) has been living in her apartment for three years. Her savings system is well organized and she feels comfortable about the progress she is making with her financial goals. Her credit card balance is now paid in full monthly. She is continuing to save more than 10% of her gross salary in her 401(k) plan and she stay within budget. After dating for two years, she is engaged to Tim Treble (age 28), and they are planning to be married in nine months. Because they want to buy a house within the next 2 or 3 years, Vikki and Tim decide to meet with a mortgage lender to determine how large of a mortgage they will be able to afford an what they need to save. The mortgage lender asks them both questions about their finances that they hadn’t yet considered. Although Vicky feel comfortable with the questions, Tim is nervous when he forced to take a closer look at his finances. He discovers that he has much more debt than he realized. Vikki and Tim’s financial statistics are shown below : Assets Liabilities Checking Account *$10,500 (Vikki), $4,000 (Tim) Including their emergency funds Student Loan $9,000 Credit Card Balances (Tim) Car $2,500 (Vikki), $15,000 (Tim) 401 (k) balance $25,000 (Vikki), $8,000 (Tim) Income Monthly Expenses Gross Annual Salary $50,000 (Vikki) $48,000 (Tim) After-Tax Monthly Salary $2,917 (Vikki) $2,800 (Tim) Rent $750 (Vikki), $450 (Tim) Food $250 (Vikki), $350 (Tim) Student Loan $250 Credit Card Payment $300 (Tim) Entertainment-$300 Wedding Expenses $500 Gas/Repairs $350 (combined) Retirement Savings : 401 (k) Vikki $500 per month, plus 50% employer match on first 7% of pay. Tim $400 per month, plus 50% match on first 8% of pay

Impact of Credit Default Swaps (CDS)

Impact of Credit Default Swaps (CDS) Chapter 1 : Introduction A Swap is a derivative in which two counterparties agree to exchange one stream of cash flow against another stream. Swaps can be used to create unfunded exposures to an underlying asset, since counterparties can earn the profit or loss from movements in price without having to post the notional amount in cash or collateral. It can be used to hedge certain risks such as interest rate risk, or to speculate on changes in the expected direction of underlying prices. The main objective of the project is to understand about Credit Default Swaps (CDS), its global footprint, its role in subprime crisis, its settlement in global arena and to check the feasible settlement of CDS in India, after its introduction in India, by understanding about Indian Credit Derivatives market. Research is concerned with the systematic and objective collection, analysis and evaluation of information about specific aspects to check the feasible settlement of CDSs in India. The development of financial derivatives in recent past is astounding when we consider its volume globally. But at the same time the product once created for hedging the risk currently allows you to bear more risk sometimes making the whole financial system to tremble. May be thats why Warren Buffet called it a financial weapon of mass destruction. Whatever it may be but derivatives have grown exponentially and are necessary for the market to flourish. The credit derivatives are nothing but the logical extension to the family of derivatives and have already made its presence felt globally. The credit derivatives have played a significant role in the development of debt market but also share a blame for the proliferation of subprime crisis. A credit default swap which constitutes the major portion of credit derivatives is similar to an insurance contract which allows you to transfer your risk to third party in exchange of a premium. Right from its origin as plain vanilla product for hedging purpose it has grown to very complex products and now has posed a question mark on its credibility. The subprime crisis started in what were regarded as the worlds safest and most sophisticated markets and spread globally, carried by securities and derivatives that were thought to make the financial system safer. The subprime crisis brings the complexity of securitized products and derivatives products, the human greedy nature, inability of rating agencies to gauge the risk, inefficiency of regulatory bodies, etc. to the fore. Although CDS was not the cause of the subprime crisis but it had cascading effect on the market and was considered as the reason for the collapse of American International Group (AIG). The lessons from the consequences of subprime crisis have helped in creating awareness about the regulatory frameworks to be in place which has increased the transparency, standardization, and soundness in the market. The various measures include formation of central counterparty for CDS, hardwiring of auction protocol and ISDA determination committee. On the backdrop of global crisis the movement of CDS is being watched carefully. The various data sources now provide data even on weekly basis. The efforts are being paid off and the market size of CDS has reduced considerably. And now with the central counterparties in place the CDS market will have more transparency and better control. After opening up of the economy the equity market of India have grown significantly bringing in more transparency. But the corporate bond market is still in undeveloped mode and the efforts being taken on developing it have not provided expected returns. Under this light, India is now all set to launch Credit Default Swaps which are expected to ignite the spark which will flourish the corporate bond market. Considering the cautious nature of RBI and the havoc created by CDS in global market the move by RBI is significant. From the move of RBI one can say as the knife itself is not harmful but it depends whether its in doctors hand or a robbers hand. Similarly CDS as a product is certainly not harmful but its utility will depend on the judicious use of the same. Chapter 2: Literature Review Derivatives The global economic order that emerged after World War II was a system where many less developed countries administered prices and centrally allocated resources. Even the developed economies operated under the Bretton Woods system of fixed exchange rates. The system of fixed prices came under stress from the 1970s onwards. High inflation and unemployment rates made interest rates more volatile. The Bretton Woods system was dismantled in 1971, freeing exchange rates to fluctuate. Less developed countries like India began opening up their economies and allowing prices to vary with market conditions. Price fluctuations made it hard for businesses to estimate their future production costs and revenues. Derivative securities provide them with a valuable set of tools for managing this risk. Financial markets are, by nature, extremely volatile and hence, the risk factor is an Important concern for financial agents. To reduce this risk, the concept of derivatives comes into the picture. Derivatives are products whose values are derived from one or more basic variables called bases. These bases can be underlying assets (for example forex, equity, etc), bases or reference rates. It is afinancial instrument(or more simply, an agreement between two people/two parties) that has a value determined by the future price of something else. Derivatives can be thought of as bets on the price of something.Itis the collective name used for a broad class offinancial instrumentsthatderivetheir value from other financial instruments (known as the underlying), events or conditions. Essentially, a derivative is a contract between two parties where the value of the contract is linked to the price of another financial instrument or by a specified event or condition. Asecurity whose price is dependent upon or derived fromone or more underlying assets.The derivative itself is merely a contract between two or more parties. Itsvalue is determinedby fluctuationsin the underlying asset.The most common underlying assets includestocks, bonds,commodities,currencies, interest rates and market indexes. Most derivatives are characterized by high leverage.Derivatives are generally used as an instrument to hedgerisk, but can also be used forspeculative purposes. For example, wheat farmers may wish to sell their harvest at a future date to eliminate the risk of a change in prices by that date. The transaction in this case would be the derivative, while the spot price of wheat would be the underlying asset. Derivatives have probably been around for as long as people have been trading with one another. Forward contracting dates back at least to the 12th century, and may well have been around before then. Merchants entered into contracts with one another for future delivery of specified amount of commodities at specified price. A primary motivation for pre-arranging a buyer or seller for a stock of commodities in early forward contracts was to lessen the possibility that large swings would inhibit marketing the commodity after a harvest. The need for a derivatives market The derivatives market performs a number of economic functions: They help in transferring risks from risk averse people to risk oriented people They help in the discovery of future as well as current prices They catalyze entrepreneurial activity They increase the volume traded in markets because of participation of risk averse people in greater numbers They increase savings and investment in the long run The participants in a derivatives market Hedgers use futures or options markets to reduce or eliminate the risk associated with price of an asset. Speculators use futures and options contracts to get extra leverage in betting on future movements in the price of an asset. They can increase both the potential gains and potential losses by usage of derivatives in a speculative venture. Arbitrageurs are in business to take advantage of a discrepancy between prices in two different markets. If, for example, they see the futures price of an asset getting out of line with the cash price, they will take offsetting positions in the two markets to lock in a profit. Types of Derivatives Forwards: A forward contract is a customized contract between two entities, where settlement takes place on a specific date in the future at todays pre-agreed price. Futures: A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Futures contracts are special types of forward contracts in the sense that the former are standardized exchange-traded contracts Options: Options are of two types calls and puts. Calls give the buyer the right but not the obligation to buy a given quantity of the underlying asset, at a given price on or before a given future date. Puts give the buyer the right, but not the obligation to sell a given quantity of the underlying asset at a given price on or before a given date. Warrants: Options generally have lives of upto one year, the majority of options traded on options exchanges having a maximum maturity of nine months. Longer-dated options are called warrants and are generally traded over-the-counter. LEAPS: The acronym LEAPS means Long-Term Equity Anticipation Securities. These are options having a maturity of upto three years. Baskets: Basket options are options on portfolios of underlying assets. The underlying asset is usually a moving average or a basket of assets. Equity index options are a form of basket options. Swaps: Swaps are private agreements between two parties to exchange cash flows in the future according to a prearranged formula. They can be regarded as portfolios of forward contracts. The two commonly used swaps are : Interest rate swaps: These entail swapping only the interest related cash flows between the parties in the same currency. Currency swaps: These entail swapping both principal and interest between the parties, with the cash flows in one direction being in a different currency than those in the opposite direction. Swaptions: Swaptions are options to buy or sell a swap that will become operative at the expiry of the options. Thus a swaption is an option on a forward swap. Rather than have calls and puts, the swaptions market has receiver swaptions and payer swaptions. A receiver swaption is an option to receive fixed and pay floating. A payer swaption is an options to pay fixed and receive floating. Uses of Derivatives Derivatives may be traded for a variety of reasons. A derivative enables a trader to hedge some pre-existing risk by taking positions in derivatives markets that offset potential losses in the underlying or spot market. In India, most derivatives users describe themselves as hedgers (Fitch Ratings, 2004) and Indian laws generally require that derivatives be used for hedging purposes only. Another motive for derivatives trading is speculation (i.e. taking positions to profit from anticipated price movements). In practice, it may be difficult to distinguish whether a particular trade was for hedging or speculation, and active markets require the participation of both hedgers and speculators. A third type of trader, called arbitrageurs, profit from discrepancies in the relationship of spot and derivatives prices, and thereby help to keep markets efficient. Jogani and Fernandes (2003) describe Indias long history in arbitrage trading, with line operators and traders arbitraging prices between exchanges located in different cities, and between two exchanges in the same city. Their study of Indian equity derivatives markets in 2002 indicates that markets were inefficient at that time. They argue that lack of knowledge; market frictions and regulatory impediments have led to low levels of capital employed in arbitrage trading in India. However, more recent evidence suggests that the efficiency of Indian equity derivatives markets may have improved (ISMR, 2004). Development of derivatives market in India Derivatives markets have been in existence in India in some form or other for a long time. In the area of commodities, the Bombay Cotton Trade Association started futures trading in 1875 and, by the early 1900s India had one of the worlds largest futures industry. In 1952 the government banned cash settlement and options trading and derivatives trading shifted to informal forwards markets. In recent years, government policy has changed, allowing for an increased role for market-based pricing and less suspicion of derivatives trading. The ban on futures trading of many commodities was lifted starting in the early 2000s, and national electronic commodity exchanges were created. In the equity markets, a system of trading called badla involving some elements of forwards trading had been in existence for decades.6 However, the system led to a number of undesirable practices and it was prohibited off and on till the Securities and Exchange Board of India (SEBI) banned it for good in 2001. A series of reforms of the stock market between 1993 and 1996 paved the way for the development of exchange-traded equity derivatives markets in India. In 1993, the government created the NSE in collaboration with state-owned financial institutions. NSE improved the efficiency and transparency of the stock markets by offering a fully automated screen-based trading system and real-time price dissemination. In 1995, a prohibition on trading options was lifted. In 1996, the NSE sent a proposal to SEBI for listing exchange-traded derivatives. The report of the L. C. Gupta Committee, set up by SEBI, recommended a phased introduction of derivative products, and bi-level regulation ( i.e., self-regulation by exchanges with SEBI providing a supervisory and advisory role). Another report, by the J. R. Varma Committee in 1998, worked out various operational details such as the margining systems. The first step towards introduction of derivatives trading in India was the promulgation of the Securities Laws(Amendment) Ordinance, 1995, which withdrew the prohibition on options in securities. The market for derivatives, however, did not take off, as there was no regulatory framework to govern trading of derivatives. SEBI set up a 24-member committee under the Chairmanship of Dr.L.C.Gupta on November 18, 1996 to develop appropriate regulatory framework for derivatives trading in India. The committee submitted its report on March 17, 1998 prescribing necessary pre-conditions for introduction of derivatives trading in India. The committee recommended that derivatives should be declared as securities so that regulatory framework applicable to trading of securities could also govern trading of securities. SEBI also set up a group in June 1998 under the Chairmanship of Prof.J.R.Varma, to recommend measures for risk control in derivatives market in India. The report, which was submitte d in October 1998, worked out the operational details of margining system, methodology for charging initial margins, broker net worth, deposit requirement and real-time monitoring requirements. The Securities Contract Regulation Act (SCRA) was amended in December 1999 to include derivatives within the ambit of securities and the regulatory framework was developed for governing derivatives trading. The act also made it clear that derivatives shall be legal and valid only if such contracts are traded on a recognized stock exchange, thus precluding OTC derivatives. The government also rescinded in March 2000, the three- decade old notification, which prohibited forward trading in securities. Derivatives trading commenced in India in June 2000 after SEBI granted the final approval to this effect in May 2001. SEBI permitted the derivative segments of two stock exchanges, NSE and BSE, and their clearing house/corporation to commence trading and settlement in approved derivatives contracts . To begin with, SEBI approved trading in index futures contracts based on SP CNX Nifty and BSE-30(Sensex) index. This was followed by approval for trading in options based on these two indexes and options on individual securities. The trading in BSE Sensex options commenced on June 4, 2001 and the trading in options on individual securities commenced in July 2001. Futures contracts on individual stocks were launched in November 2001. The derivatives trading on NSE commenced with SP CNX Nifty Index futures on June 12, 2000. The trading in index options commenced on June 4, 2001 and trading in options on individual securities commenced on July 2, 2001. Single stock futures were launched on November 9, 2001. The index futures and options contract on NSE are based on SP CNX Trading and settlement in derivative contracts is done in accordance with the rules, byelaws, and regulations of the respective exchanges and their clearing house/corporation duly approved by SEBI and notified in the official gazette. Foreign Institutional Investors (FIIs) are permitted to trade in all Exchange traded derivative products. The following are some observations based on the trading statistics provided in the NSE report on the futur es and options (FO): †¢ Single-stock futures continue to account for a sizable proportion of the FO segment. It constituted 70 per cent of the total turnover during June 2002. A primary reason attributed to this phenomenon is that traders are comfortable with single-stock futures than equity options, as the former closely resembles the erstwhile badla system. On relative terms, volumes in the index options segment continues to remain poor. This may be due to the low volatility of the spot index. Typically, options are considered more valuable when the volatility of the underlying (in this case, the index) is high. A related issue is that brokers do not earn high commissions by recommending index options to their clients, because low volatility leads to higher waiting time for round-trips. Put volumes in the index options and equity options segment have increased since January 2002. The call-put volumes in index options have decreased from 2.86 in January 2002 to 1.32 in June. The fall in call-put volumes ratio suggests that the traders are increasingly becoming pessimistic on the market. Farther month futures contracts are still not actively traded. Trading in equity options on most stocks for even the next month was non-existent. Daily option price variations suggest that traders use the FO segment as a less risky alternative (read substitute) to generate profits from the stock price movements. The fact that the option premiums tail intra-day stock prices is evidence to this. Calls on Satyam fall, while puts rise when Satyam falls intra-day. If calls and puts are not looked as just substitutes for spot trading, the intra-day stock price variations should not have a one-to-one impact on the option premiums. SWAP In finance, a SWAP is a derivative in which two counterparties agree to exchange one stream of cash flow against another stream. These streams are called the legs of the swap. Conventionally they are the exchange of one security for another to change the maturity (bonds), quality of issues (stocks or bonds), or because investment objectives have changed. A swap is an agreement to exchange one stream of cash flows for another. Swaps are most usually used to:- Switch financing in one country for financing in another To replace a floating interest rate swap with a fixed interest rate (or vice versa) (Litzenberger, R.H)In August 1981 the World Bank issued $290 million in euro-bonds and swapped the interest and principal on these bonds with IBM for Swiss francs and German marks. The rapid growth in the use of interest rate swaps, currency swaps, and swaptions (options on swaps) has been phenomenal. Currently, the amount of outstanding interest rate and currency swaps is almost $3 trillion. Recently, swaps have grown to include currency swaps and interest rate swaps. It can be used to hedge certain risks such as interest rate risk, or to speculate on changes in the expected direction of underlying prices. If firms in separate countries have comparative advantages on interest rates, then a swap could benefit both firms. For example, one firm may have a lower fixed interest rate, while another has access to a lower floating interest rate. These firms could swap to take advantage of the lower rates. Different types of swaps:- Currency Swaps Cross currency swaps are agreements between counterparties to exchange interest and principal payments in different currencies. Like a forward, a cross currency swap consists of the exchange of principal amounts (based on todays spot rate) and interest payments between counterparties. It is considered to be a foreign exchange transaction and is not required by law to be shown on the balance sheet. In a currency swap, these streams of cash flows consist of a stream of interest and principal payments in one currency exchanged for a stream, of interest and principal payments of the same maturity in another currency. Because of the exchange and re-exchange of notional principal amounts, the currency swap generates a larger credit exposure than the interest rate swap. Cross-currency swaps can be used to transform the currency denomination of assets and liabilities. They are effective tools for managing foreign currency risk. They can create currency match within its portfolio and minimize exposures. Firms can use them to hedge foreign currency debts and foreign net investments. Currency swaps give companies extra flexibility to exploit their comparative advantage in their respective borrowing markets. Currency swaps allow companies to exploit advantages across a matrix of currencies and maturities. Currency swaps were originally done to get around exchange controls and hedge the risk on currency rate movements. It also helps in Reducing costs and risks associated with currency exchange. They are often combined with interest rate swaps. For example, one company would seek to swap a cash flow for their fixed rate debt denominated in US dollars for a floating-rate debt denominated in Euro. This is especially common in Europe where companies shop for the cheapest debt regardless of its denomination and then seek to exchange it for the debt in desired currency. Credit Default Swap Credit Default Swap is a financial instrument for swapping the risk of debt default. Credit default swaps may be used for emerging market bonds, mortgage backed securities, corporate bonds and local government bond. The buyer of a credit default swap pays a premium for effectively insuring against a debt default. He receives a lump sum payment if the debt instrument is defaulted. The seller of a credit default swap receives monthly payments from the buyer. If the debt instrument defaults they have to pay the agreed amount to the buyer of the credit default swap. The first credit default swap was introduced in 1995 by JP Morgan. By 2007, their total value has increased to an estimated $45 trillion to $62 trillion. Although since only 0.2% of Investment Companys default, the cash flow is much lower than this actual amount. Therefore, this shows that credit default swaps are being used for speculation and not insuring against actual bonds. As Warren Buffett calls them financial weapons of mass destruction. The credit default swaps are being blamed for much of the current market meltdown. Example of Credit Default Swap An investment trust owns  £1 million corporation bond issued by a private housing firm. If there is a risk the private housing firm may default on repayments, the investment trust may buy a CDS from a hedge fund. The CDS is worth  £1 million. The investment trust will pay an interest on this credit default swap of say 3%. This could involve payments of  £30,000 a year for the duration of the contract. If the private housing firm doesnt default. The hedge fund gains the interest from the investment bank and pays nothing out. It is simple profit. If the private housing firm does default, then the hedge fund has to pay compensation to the investment bank of  £1 million the value of the credit default swap. Therefore the hedge fund takes on a larger risk and could end up paying  £1million The higher the perceived risk of the bond, the higher the interest rate the hedge fund will require. Credit default swaps are used not only by investment banks, but also by other financial institutions. Corporate entities use credit default swaps either for protection purposes, to hedge or to sell. Investment banks are primarily affected by the buyers. If a number of major corporate entities have bought protection from the same investment bank, and all of them fail simultaneously, this will put pressure on the investment bank to pay out. Moreover, the credit risk caused by the above failure may lead to other risks, such as liquidity risk, market risk and operational risk. Therefore, most of the investment banks re-sell the sold protection on the market to other market participants. Edwards (2004) argues that derivatives do not reduce credit risk, but rather transfer it from banks to other banks or entities. Therefore, most of the investment banks re-sell the sold protection on the market to other market participants. Edwards (2004) argues that derivatives do not reduce credit risk, but rather transfer it from banks to other banks or entities. Some of the top banks in America are carrying unknown gambling risks that no one has warned about, and they are all tied up in U.S. bank derivative portfolios (Edwards M, 2004). Commodity Swap A commodity swap is an agreement whereby a floating (or market or spot) price is exchanged for a fixed price over a specified period. The vast majority of commodity swaps involve oil. A swap where exchanged cash flows are dependent on the price of an underlying commodity. This swap is usually used to hedge against the price of a commodity. Commodities are physical assets such as precious metals, base metals, energy stores (such as natural gas or crude oil) and food (including wheat, pork bellies, cattle, etc.). In this swap, the user of a commodity would secure a maximum price and agree to pay a financial institution this fixed price. Then in return, the user would get payments based on the market price for the commodity involved. They are used for hedging against Fluctuations in commodity prices or Fluctuations in spreads between final product and raw material prices. A company that uses commodities as input may find its profits becoming very volatile if the commodity prices become volatile. This is particularly so when the output prices may not change as frequently as the commodity prices change. In such cases, the company would enter into a swap whereby it receives payment linked to commodity prices and pays a fixed rate in exchange. There are two kinds of agents participating in the commodity markets: end-users (hedgers) and investors (speculators). Commodity swaps are becoming increasingly common in the energy and agricultural industries, where demand and supply are both subject to considerable uncertainty. For example, heavy users of oil, such as airlines, will often enter into contracts in which they agree to make a series of fixed payments, say every six months for two years, and receive payments on those same dates as determined by an oil price index. Computations are often based on a specific number of tons of oil in order to lock in the price the airline pays for a specific quantity of oil, purchased at regular intervals over the two-year period. However, the airline will typically buy the actual oil it needs from the spot market. Equity Swap The outstanding performance of equity markets in the 1980s and the 1990s, have brought in some technological innovations that have made widespread participation in the equity market more feasible and more marketable and the demographic imperative of baby-boomer saving has generated significant interest in equity derivatives. In addition to the listed equity options on individual stocks and individual indices, a burgeoning over-the-counter (OTC) market has evolved in the distribution and utilization of equity swaps. An equity swap is a special type of total return swap, where the underlying asset is a stock, a basket of stocks, or a stock index. An exchange of the potential appreciation of equitys value and dividends for a guaranteed return plus any decrease in the value of the equity. An equity swap permits an equity holder a guaranteed return but demands the holder give up all rights to appreciation and dividend income. Compared to actually owning the stock, in this case you do not have to pay anything up front, but you do not have any voting or other rights that stock holders do have. Equity swaps make the index trading strategy even easier. Besides diversification and tax benefits, equity swaps also allow large institutions to hedge specific assets or positions in their portfolios The equity swap is the best swap amongst all the other swaps as it being an over-the-counter derivatives transaction; they have the attractive feature of being customizable for a particular users situation. Investors may have specific time horizons, portfolio compositions, or other terms and conditions that are not matched by exchange-listed derivatives. They are private transactions that are not directly reportable to any regulatory authority. A derivatives dealer can, through a foreign subsidiary in the particular country, invest in the foreign securities without the withholding tax and enter into a swap with the parent dealer company, which can then enter a swap with the American investor, effectively passing on the dividends without the withholding tax Interest Rate Swap An interest rate swap, or simply a rate swap, is an agreement between two parties to exchange a sequence of interest payments without exchanging the underlying debt. In a typical fixed/floating rate swap, the first party promises to pay to the second at designated intervals a stipulated amount of interest calculated at a fixed rate on the notional principal; the second party promises to pay to the first at the same intervals a floating amount of interest on the notional principle calculated according to a floating-rate index. The interest rate swap is essentially a strip of forward contracts exchanging interest payments. Thus, interest rate swaps, like interest rate futures or interest rate forward contracts, offer a mechanism for restructuring cash flows and, if properly used, provide a financial instrument for hedging against interest rate risk The reason for the exchange of the interest obligation is to take benefit from comparative advantage. Some companies may have comparative advantage in fixed rate markets while other companies have a comparative advantage in floating rate markets. When companies want to borrow they look for cheap borrowing i.e. from the market where they have comparative advantage. However this may lead to a company borrowing fixed when it wants floating or borrowing floating when it wants fixed. This is where a swap comes in. A swap has the effect of transforming a fixed rate loan into a float Impact of Credit Default Swaps (CDS) Impact of Credit Default Swaps (CDS) Chapter 1 : Introduction A Swap is a derivative in which two counterparties agree to exchange one stream of cash flow against another stream. Swaps can be used to create unfunded exposures to an underlying asset, since counterparties can earn the profit or loss from movements in price without having to post the notional amount in cash or collateral. It can be used to hedge certain risks such as interest rate risk, or to speculate on changes in the expected direction of underlying prices. The main objective of the project is to understand about Credit Default Swaps (CDS), its global footprint, its role in subprime crisis, its settlement in global arena and to check the feasible settlement of CDS in India, after its introduction in India, by understanding about Indian Credit Derivatives market. Research is concerned with the systematic and objective collection, analysis and evaluation of information about specific aspects to check the feasible settlement of CDSs in India. The development of financial derivatives in recent past is astounding when we consider its volume globally. But at the same time the product once created for hedging the risk currently allows you to bear more risk sometimes making the whole financial system to tremble. May be thats why Warren Buffet called it a financial weapon of mass destruction. Whatever it may be but derivatives have grown exponentially and are necessary for the market to flourish. The credit derivatives are nothing but the logical extension to the family of derivatives and have already made its presence felt globally. The credit derivatives have played a significant role in the development of debt market but also share a blame for the proliferation of subprime crisis. A credit default swap which constitutes the major portion of credit derivatives is similar to an insurance contract which allows you to transfer your risk to third party in exchange of a premium. Right from its origin as plain vanilla product for hedging purpose it has grown to very complex products and now has posed a question mark on its credibility. The subprime crisis started in what were regarded as the worlds safest and most sophisticated markets and spread globally, carried by securities and derivatives that were thought to make the financial system safer. The subprime crisis brings the complexity of securitized products and derivatives products, the human greedy nature, inability of rating agencies to gauge the risk, inefficiency of regulatory bodies, etc. to the fore. Although CDS was not the cause of the subprime crisis but it had cascading effect on the market and was considered as the reason for the collapse of American International Group (AIG). The lessons from the consequences of subprime crisis have helped in creating awareness about the regulatory frameworks to be in place which has increased the transparency, standardization, and soundness in the market. The various measures include formation of central counterparty for CDS, hardwiring of auction protocol and ISDA determination committee. On the backdrop of global crisis the movement of CDS is being watched carefully. The various data sources now provide data even on weekly basis. The efforts are being paid off and the market size of CDS has reduced considerably. And now with the central counterparties in place the CDS market will have more transparency and better control. After opening up of the economy the equity market of India have grown significantly bringing in more transparency. But the corporate bond market is still in undeveloped mode and the efforts being taken on developing it have not provided expected returns. Under this light, India is now all set to launch Credit Default Swaps which are expected to ignite the spark which will flourish the corporate bond market. Considering the cautious nature of RBI and the havoc created by CDS in global market the move by RBI is significant. From the move of RBI one can say as the knife itself is not harmful but it depends whether its in doctors hand or a robbers hand. Similarly CDS as a product is certainly not harmful but its utility will depend on the judicious use of the same. Chapter 2: Literature Review Derivatives The global economic order that emerged after World War II was a system where many less developed countries administered prices and centrally allocated resources. Even the developed economies operated under the Bretton Woods system of fixed exchange rates. The system of fixed prices came under stress from the 1970s onwards. High inflation and unemployment rates made interest rates more volatile. The Bretton Woods system was dismantled in 1971, freeing exchange rates to fluctuate. Less developed countries like India began opening up their economies and allowing prices to vary with market conditions. Price fluctuations made it hard for businesses to estimate their future production costs and revenues. Derivative securities provide them with a valuable set of tools for managing this risk. Financial markets are, by nature, extremely volatile and hence, the risk factor is an Important concern for financial agents. To reduce this risk, the concept of derivatives comes into the picture. Derivatives are products whose values are derived from one or more basic variables called bases. These bases can be underlying assets (for example forex, equity, etc), bases or reference rates. It is afinancial instrument(or more simply, an agreement between two people/two parties) that has a value determined by the future price of something else. Derivatives can be thought of as bets on the price of something.Itis the collective name used for a broad class offinancial instrumentsthatderivetheir value from other financial instruments (known as the underlying), events or conditions. Essentially, a derivative is a contract between two parties where the value of the contract is linked to the price of another financial instrument or by a specified event or condition. Asecurity whose price is dependent upon or derived fromone or more underlying assets.The derivative itself is merely a contract between two or more parties. Itsvalue is determinedby fluctuationsin the underlying asset.The most common underlying assets includestocks, bonds,commodities,currencies, interest rates and market indexes. Most derivatives are characterized by high leverage.Derivatives are generally used as an instrument to hedgerisk, but can also be used forspeculative purposes. For example, wheat farmers may wish to sell their harvest at a future date to eliminate the risk of a change in prices by that date. The transaction in this case would be the derivative, while the spot price of wheat would be the underlying asset. Derivatives have probably been around for as long as people have been trading with one another. Forward contracting dates back at least to the 12th century, and may well have been around before then. Merchants entered into contracts with one another for future delivery of specified amount of commodities at specified price. A primary motivation for pre-arranging a buyer or seller for a stock of commodities in early forward contracts was to lessen the possibility that large swings would inhibit marketing the commodity after a harvest. The need for a derivatives market The derivatives market performs a number of economic functions: They help in transferring risks from risk averse people to risk oriented people They help in the discovery of future as well as current prices They catalyze entrepreneurial activity They increase the volume traded in markets because of participation of risk averse people in greater numbers They increase savings and investment in the long run The participants in a derivatives market Hedgers use futures or options markets to reduce or eliminate the risk associated with price of an asset. Speculators use futures and options contracts to get extra leverage in betting on future movements in the price of an asset. They can increase both the potential gains and potential losses by usage of derivatives in a speculative venture. Arbitrageurs are in business to take advantage of a discrepancy between prices in two different markets. If, for example, they see the futures price of an asset getting out of line with the cash price, they will take offsetting positions in the two markets to lock in a profit. Types of Derivatives Forwards: A forward contract is a customized contract between two entities, where settlement takes place on a specific date in the future at todays pre-agreed price. Futures: A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Futures contracts are special types of forward contracts in the sense that the former are standardized exchange-traded contracts Options: Options are of two types calls and puts. Calls give the buyer the right but not the obligation to buy a given quantity of the underlying asset, at a given price on or before a given future date. Puts give the buyer the right, but not the obligation to sell a given quantity of the underlying asset at a given price on or before a given date. Warrants: Options generally have lives of upto one year, the majority of options traded on options exchanges having a maximum maturity of nine months. Longer-dated options are called warrants and are generally traded over-the-counter. LEAPS: The acronym LEAPS means Long-Term Equity Anticipation Securities. These are options having a maturity of upto three years. Baskets: Basket options are options on portfolios of underlying assets. The underlying asset is usually a moving average or a basket of assets. Equity index options are a form of basket options. Swaps: Swaps are private agreements between two parties to exchange cash flows in the future according to a prearranged formula. They can be regarded as portfolios of forward contracts. The two commonly used swaps are : Interest rate swaps: These entail swapping only the interest related cash flows between the parties in the same currency. Currency swaps: These entail swapping both principal and interest between the parties, with the cash flows in one direction being in a different currency than those in the opposite direction. Swaptions: Swaptions are options to buy or sell a swap that will become operative at the expiry of the options. Thus a swaption is an option on a forward swap. Rather than have calls and puts, the swaptions market has receiver swaptions and payer swaptions. A receiver swaption is an option to receive fixed and pay floating. A payer swaption is an options to pay fixed and receive floating. Uses of Derivatives Derivatives may be traded for a variety of reasons. A derivative enables a trader to hedge some pre-existing risk by taking positions in derivatives markets that offset potential losses in the underlying or spot market. In India, most derivatives users describe themselves as hedgers (Fitch Ratings, 2004) and Indian laws generally require that derivatives be used for hedging purposes only. Another motive for derivatives trading is speculation (i.e. taking positions to profit from anticipated price movements). In practice, it may be difficult to distinguish whether a particular trade was for hedging or speculation, and active markets require the participation of both hedgers and speculators. A third type of trader, called arbitrageurs, profit from discrepancies in the relationship of spot and derivatives prices, and thereby help to keep markets efficient. Jogani and Fernandes (2003) describe Indias long history in arbitrage trading, with line operators and traders arbitraging prices between exchanges located in different cities, and between two exchanges in the same city. Their study of Indian equity derivatives markets in 2002 indicates that markets were inefficient at that time. They argue that lack of knowledge; market frictions and regulatory impediments have led to low levels of capital employed in arbitrage trading in India. However, more recent evidence suggests that the efficiency of Indian equity derivatives markets may have improved (ISMR, 2004). Development of derivatives market in India Derivatives markets have been in existence in India in some form or other for a long time. In the area of commodities, the Bombay Cotton Trade Association started futures trading in 1875 and, by the early 1900s India had one of the worlds largest futures industry. In 1952 the government banned cash settlement and options trading and derivatives trading shifted to informal forwards markets. In recent years, government policy has changed, allowing for an increased role for market-based pricing and less suspicion of derivatives trading. The ban on futures trading of many commodities was lifted starting in the early 2000s, and national electronic commodity exchanges were created. In the equity markets, a system of trading called badla involving some elements of forwards trading had been in existence for decades.6 However, the system led to a number of undesirable practices and it was prohibited off and on till the Securities and Exchange Board of India (SEBI) banned it for good in 2001. A series of reforms of the stock market between 1993 and 1996 paved the way for the development of exchange-traded equity derivatives markets in India. In 1993, the government created the NSE in collaboration with state-owned financial institutions. NSE improved the efficiency and transparency of the stock markets by offering a fully automated screen-based trading system and real-time price dissemination. In 1995, a prohibition on trading options was lifted. In 1996, the NSE sent a proposal to SEBI for listing exchange-traded derivatives. The report of the L. C. Gupta Committee, set up by SEBI, recommended a phased introduction of derivative products, and bi-level regulation ( i.e., self-regulation by exchanges with SEBI providing a supervisory and advisory role). Another report, by the J. R. Varma Committee in 1998, worked out various operational details such as the margining systems. The first step towards introduction of derivatives trading in India was the promulgation of the Securities Laws(Amendment) Ordinance, 1995, which withdrew the prohibition on options in securities. The market for derivatives, however, did not take off, as there was no regulatory framework to govern trading of derivatives. SEBI set up a 24-member committee under the Chairmanship of Dr.L.C.Gupta on November 18, 1996 to develop appropriate regulatory framework for derivatives trading in India. The committee submitted its report on March 17, 1998 prescribing necessary pre-conditions for introduction of derivatives trading in India. The committee recommended that derivatives should be declared as securities so that regulatory framework applicable to trading of securities could also govern trading of securities. SEBI also set up a group in June 1998 under the Chairmanship of Prof.J.R.Varma, to recommend measures for risk control in derivatives market in India. The report, which was submitte d in October 1998, worked out the operational details of margining system, methodology for charging initial margins, broker net worth, deposit requirement and real-time monitoring requirements. The Securities Contract Regulation Act (SCRA) was amended in December 1999 to include derivatives within the ambit of securities and the regulatory framework was developed for governing derivatives trading. The act also made it clear that derivatives shall be legal and valid only if such contracts are traded on a recognized stock exchange, thus precluding OTC derivatives. The government also rescinded in March 2000, the three- decade old notification, which prohibited forward trading in securities. Derivatives trading commenced in India in June 2000 after SEBI granted the final approval to this effect in May 2001. SEBI permitted the derivative segments of two stock exchanges, NSE and BSE, and their clearing house/corporation to commence trading and settlement in approved derivatives contracts . To begin with, SEBI approved trading in index futures contracts based on SP CNX Nifty and BSE-30(Sensex) index. This was followed by approval for trading in options based on these two indexes and options on individual securities. The trading in BSE Sensex options commenced on June 4, 2001 and the trading in options on individual securities commenced in July 2001. Futures contracts on individual stocks were launched in November 2001. The derivatives trading on NSE commenced with SP CNX Nifty Index futures on June 12, 2000. The trading in index options commenced on June 4, 2001 and trading in options on individual securities commenced on July 2, 2001. Single stock futures were launched on November 9, 2001. The index futures and options contract on NSE are based on SP CNX Trading and settlement in derivative contracts is done in accordance with the rules, byelaws, and regulations of the respective exchanges and their clearing house/corporation duly approved by SEBI and notified in the official gazette. Foreign Institutional Investors (FIIs) are permitted to trade in all Exchange traded derivative products. The following are some observations based on the trading statistics provided in the NSE report on the futur es and options (FO): †¢ Single-stock futures continue to account for a sizable proportion of the FO segment. It constituted 70 per cent of the total turnover during June 2002. A primary reason attributed to this phenomenon is that traders are comfortable with single-stock futures than equity options, as the former closely resembles the erstwhile badla system. On relative terms, volumes in the index options segment continues to remain poor. This may be due to the low volatility of the spot index. Typically, options are considered more valuable when the volatility of the underlying (in this case, the index) is high. A related issue is that brokers do not earn high commissions by recommending index options to their clients, because low volatility leads to higher waiting time for round-trips. Put volumes in the index options and equity options segment have increased since January 2002. The call-put volumes in index options have decreased from 2.86 in January 2002 to 1.32 in June. The fall in call-put volumes ratio suggests that the traders are increasingly becoming pessimistic on the market. Farther month futures contracts are still not actively traded. Trading in equity options on most stocks for even the next month was non-existent. Daily option price variations suggest that traders use the FO segment as a less risky alternative (read substitute) to generate profits from the stock price movements. The fact that the option premiums tail intra-day stock prices is evidence to this. Calls on Satyam fall, while puts rise when Satyam falls intra-day. If calls and puts are not looked as just substitutes for spot trading, the intra-day stock price variations should not have a one-to-one impact on the option premiums. SWAP In finance, a SWAP is a derivative in which two counterparties agree to exchange one stream of cash flow against another stream. These streams are called the legs of the swap. Conventionally they are the exchange of one security for another to change the maturity (bonds), quality of issues (stocks or bonds), or because investment objectives have changed. A swap is an agreement to exchange one stream of cash flows for another. Swaps are most usually used to:- Switch financing in one country for financing in another To replace a floating interest rate swap with a fixed interest rate (or vice versa) (Litzenberger, R.H)In August 1981 the World Bank issued $290 million in euro-bonds and swapped the interest and principal on these bonds with IBM for Swiss francs and German marks. The rapid growth in the use of interest rate swaps, currency swaps, and swaptions (options on swaps) has been phenomenal. Currently, the amount of outstanding interest rate and currency swaps is almost $3 trillion. Recently, swaps have grown to include currency swaps and interest rate swaps. It can be used to hedge certain risks such as interest rate risk, or to speculate on changes in the expected direction of underlying prices. If firms in separate countries have comparative advantages on interest rates, then a swap could benefit both firms. For example, one firm may have a lower fixed interest rate, while another has access to a lower floating interest rate. These firms could swap to take advantage of the lower rates. Different types of swaps:- Currency Swaps Cross currency swaps are agreements between counterparties to exchange interest and principal payments in different currencies. Like a forward, a cross currency swap consists of the exchange of principal amounts (based on todays spot rate) and interest payments between counterparties. It is considered to be a foreign exchange transaction and is not required by law to be shown on the balance sheet. In a currency swap, these streams of cash flows consist of a stream of interest and principal payments in one currency exchanged for a stream, of interest and principal payments of the same maturity in another currency. Because of the exchange and re-exchange of notional principal amounts, the currency swap generates a larger credit exposure than the interest rate swap. Cross-currency swaps can be used to transform the currency denomination of assets and liabilities. They are effective tools for managing foreign currency risk. They can create currency match within its portfolio and minimize exposures. Firms can use them to hedge foreign currency debts and foreign net investments. Currency swaps give companies extra flexibility to exploit their comparative advantage in their respective borrowing markets. Currency swaps allow companies to exploit advantages across a matrix of currencies and maturities. Currency swaps were originally done to get around exchange controls and hedge the risk on currency rate movements. It also helps in Reducing costs and risks associated with currency exchange. They are often combined with interest rate swaps. For example, one company would seek to swap a cash flow for their fixed rate debt denominated in US dollars for a floating-rate debt denominated in Euro. This is especially common in Europe where companies shop for the cheapest debt regardless of its denomination and then seek to exchange it for the debt in desired currency. Credit Default Swap Credit Default Swap is a financial instrument for swapping the risk of debt default. Credit default swaps may be used for emerging market bonds, mortgage backed securities, corporate bonds and local government bond. The buyer of a credit default swap pays a premium for effectively insuring against a debt default. He receives a lump sum payment if the debt instrument is defaulted. The seller of a credit default swap receives monthly payments from the buyer. If the debt instrument defaults they have to pay the agreed amount to the buyer of the credit default swap. The first credit default swap was introduced in 1995 by JP Morgan. By 2007, their total value has increased to an estimated $45 trillion to $62 trillion. Although since only 0.2% of Investment Companys default, the cash flow is much lower than this actual amount. Therefore, this shows that credit default swaps are being used for speculation and not insuring against actual bonds. As Warren Buffett calls them financial weapons of mass destruction. The credit default swaps are being blamed for much of the current market meltdown. Example of Credit Default Swap An investment trust owns  £1 million corporation bond issued by a private housing firm. If there is a risk the private housing firm may default on repayments, the investment trust may buy a CDS from a hedge fund. The CDS is worth  £1 million. The investment trust will pay an interest on this credit default swap of say 3%. This could involve payments of  £30,000 a year for the duration of the contract. If the private housing firm doesnt default. The hedge fund gains the interest from the investment bank and pays nothing out. It is simple profit. If the private housing firm does default, then the hedge fund has to pay compensation to the investment bank of  £1 million the value of the credit default swap. Therefore the hedge fund takes on a larger risk and could end up paying  £1million The higher the perceived risk of the bond, the higher the interest rate the hedge fund will require. Credit default swaps are used not only by investment banks, but also by other financial institutions. Corporate entities use credit default swaps either for protection purposes, to hedge or to sell. Investment banks are primarily affected by the buyers. If a number of major corporate entities have bought protection from the same investment bank, and all of them fail simultaneously, this will put pressure on the investment bank to pay out. Moreover, the credit risk caused by the above failure may lead to other risks, such as liquidity risk, market risk and operational risk. Therefore, most of the investment banks re-sell the sold protection on the market to other market participants. Edwards (2004) argues that derivatives do not reduce credit risk, but rather transfer it from banks to other banks or entities. Therefore, most of the investment banks re-sell the sold protection on the market to other market participants. Edwards (2004) argues that derivatives do not reduce credit risk, but rather transfer it from banks to other banks or entities. Some of the top banks in America are carrying unknown gambling risks that no one has warned about, and they are all tied up in U.S. bank derivative portfolios (Edwards M, 2004). Commodity Swap A commodity swap is an agreement whereby a floating (or market or spot) price is exchanged for a fixed price over a specified period. The vast majority of commodity swaps involve oil. A swap where exchanged cash flows are dependent on the price of an underlying commodity. This swap is usually used to hedge against the price of a commodity. Commodities are physical assets such as precious metals, base metals, energy stores (such as natural gas or crude oil) and food (including wheat, pork bellies, cattle, etc.). In this swap, the user of a commodity would secure a maximum price and agree to pay a financial institution this fixed price. Then in return, the user would get payments based on the market price for the commodity involved. They are used for hedging against Fluctuations in commodity prices or Fluctuations in spreads between final product and raw material prices. A company that uses commodities as input may find its profits becoming very volatile if the commodity prices become volatile. This is particularly so when the output prices may not change as frequently as the commodity prices change. In such cases, the company would enter into a swap whereby it receives payment linked to commodity prices and pays a fixed rate in exchange. There are two kinds of agents participating in the commodity markets: end-users (hedgers) and investors (speculators). Commodity swaps are becoming increasingly common in the energy and agricultural industries, where demand and supply are both subject to considerable uncertainty. For example, heavy users of oil, such as airlines, will often enter into contracts in which they agree to make a series of fixed payments, say every six months for two years, and receive payments on those same dates as determined by an oil price index. Computations are often based on a specific number of tons of oil in order to lock in the price the airline pays for a specific quantity of oil, purchased at regular intervals over the two-year period. However, the airline will typically buy the actual oil it needs from the spot market. Equity Swap The outstanding performance of equity markets in the 1980s and the 1990s, have brought in some technological innovations that have made widespread participation in the equity market more feasible and more marketable and the demographic imperative of baby-boomer saving has generated significant interest in equity derivatives. In addition to the listed equity options on individual stocks and individual indices, a burgeoning over-the-counter (OTC) market has evolved in the distribution and utilization of equity swaps. An equity swap is a special type of total return swap, where the underlying asset is a stock, a basket of stocks, or a stock index. An exchange of the potential appreciation of equitys value and dividends for a guaranteed return plus any decrease in the value of the equity. An equity swap permits an equity holder a guaranteed return but demands the holder give up all rights to appreciation and dividend income. Compared to actually owning the stock, in this case you do not have to pay anything up front, but you do not have any voting or other rights that stock holders do have. Equity swaps make the index trading strategy even easier. Besides diversification and tax benefits, equity swaps also allow large institutions to hedge specific assets or positions in their portfolios The equity swap is the best swap amongst all the other swaps as it being an over-the-counter derivatives transaction; they have the attractive feature of being customizable for a particular users situation. Investors may have specific time horizons, portfolio compositions, or other terms and conditions that are not matched by exchange-listed derivatives. They are private transactions that are not directly reportable to any regulatory authority. A derivatives dealer can, through a foreign subsidiary in the particular country, invest in the foreign securities without the withholding tax and enter into a swap with the parent dealer company, which can then enter a swap with the American investor, effectively passing on the dividends without the withholding tax Interest Rate Swap An interest rate swap, or simply a rate swap, is an agreement between two parties to exchange a sequence of interest payments without exchanging the underlying debt. In a typical fixed/floating rate swap, the first party promises to pay to the second at designated intervals a stipulated amount of interest calculated at a fixed rate on the notional principal; the second party promises to pay to the first at the same intervals a floating amount of interest on the notional principle calculated according to a floating-rate index. The interest rate swap is essentially a strip of forward contracts exchanging interest payments. Thus, interest rate swaps, like interest rate futures or interest rate forward contracts, offer a mechanism for restructuring cash flows and, if properly used, provide a financial instrument for hedging against interest rate risk The reason for the exchange of the interest obligation is to take benefit from comparative advantage. Some companies may have comparative advantage in fixed rate markets while other companies have a comparative advantage in floating rate markets. When companies want to borrow they look for cheap borrowing i.e. from the market where they have comparative advantage. However this may lead to a company borrowing fixed when it wants floating or borrowing floating when it wants fixed. This is where a swap comes in. A swap has the effect of transforming a fixed rate loan into a float